The more basic question for this report is not just what works in other countries and why. Rather, it is what might work best (or better) in Rus sia given the current state of development of its public and private sec tors. To what extent can a country “leapfrog” to a model or the essential components of a model that have been adopted by another country What is the best strategy for a country that does not have all the basic building blocks in place, where the building of these blocks will take some time, and where specific actions cannot wait until all this building is done How does a country “pick and choose” to ensure that its ex periments in alternative service delivery have reasonable prospect for success and for learning Let’s look at the New Zealand model that many countries have ap plauded. This model gives broad discretion to managers to operate within an accountability framework that specifies the results to be achieved and closely monitors the performance. The New Zealand model has embraced a management philosophy of “black letter con tractualism”67 that has not been a part of the public sector management and alternative service delivery undertaken elsewhere (e.g., United Kingdom, Australia, Sweden and Canada)68. The basic features of the “Black letter contractualism” refers to the use of written contracts, usually between ministers and senior public officials, setting out in detail a large number of obligations including, objectives, targets, performance, accountability, resources, etc.

Allen Schick. Why Most Developing Countries Should Not Try New Zealand Reforms.

http://wbln0018.worldbank.org/network/prem/premdoclib.nsf/d7fa6241ab13b22eNew Zealand model are rooted in agent principal theory and transac tion cost economics that provide the intellectual underpinnings for the management of public institutions. Unlike other countries New Zealand has applied the conceptual ideas with full fidelity to their internal logic.

However, as Schick convincingly argues this model does not offer prac tical guidance on how transition economies should go about addressing deficiencies in public management.

The argument unfolds in three stages. The first part appraises the underlying aims and concepts of the NZ model in terms of its emphasis on internal markets and contract like relationships in the public sector.

The key questions are: is the New Zealand system suitable for Russia Has it brought the promised improvements, and if it has, which of its many elements have contributed most to public sector reform The second part of the argument considers the management practices and problems of Russia in terms of the considerable informality in operating government. The basic question here is: can a country which gets things done by relying on informal practices that violate prescribed management rules sensibly broaden the discretion of managers while resorting to contractual formalities to safeguard public values and in terests The final part of the argument acknowledges that the informal ity retards development and is an inadequate basis on which to build governing capacity. We therefore suggest a sequenced and measured approach to improvements that Russia might wish to undertake rather than attempting to leapfrog to avant garde remedies.

In New Zealand, formal “black letter contractualism” has been ap plied to virtually every element of reform in order to strengthen con tract like relationships between government and ministers as purchas ers of goods and services, and departments and other entities as sup pliers. This “black letter contractualism” replaces the implicit or rela tional contracts that characterize much of traditional public administra tion. In assessing the difficulties of applying this pure model to New Zealand, Schick makes the following points:

The NZ model emphasizes matters that can be specified in con tracts, such as the purchase of outputs, but the model gives inadequate 677e006cbe17/cd2875166aa40bcc8525671300044cbcOpenDocument. This sections draws extensively upon this article.

attention to outcomes and the government’s ownership interest be cause they do not fit easily into the contracting framework.

Robust contracting depends on voluntary, self interested action.

Sometimes however, self interest defeats the government’s collective interest. This happened in the early years of reform when efforts to es tablish a senior executive service were undermined by the preferences of many managers to contract on an individual basis.

Contractualism may weaken traditional values of public service, per sonal responsibility and professionalism. It can induce managers to take a checklist approach to accountability – if it’s not specified; it’s not my responsibility.

Contract like arrangements do not themselves create arms length relationships in the public sector, nor do they enable the government to toughen its insistence on performance. In most cases, government has little choice but to contract with internal suppliers, typically its own de partments. If these fail to perform, the government can sack the chief executive and apply some pressure. But it rarely has the exit option that is essential to the effectiveness and enforcement of private contracts.

Chief executives, senior managers, and others attribute most of the improvement in government performance to the discretion given man agers, not to formal contracts. Managers differ on the value added by contracts, but few think that this distinctive feature of the NZ reforms has been the main contributor to higher operational efficiency.

Contracting is not costless. Negotiating and enforcing the many contracts entails enormous transaction costs. These costs have not been systematically studied in NZ though they take a deep bite out of operating budgets, especially those of small departments69.

Highly formal contracts and nearly pure internal markets were feasi ble in New Zealand because the country already had a robust market economy and had well established mechanisms and traditions for en forcing contracts. These conditions are only developing in Russia, which has tended to have an informal economy and a weak specifica tion of property rights and other formal processes to regulate private sector economic activity. The emergence of open and robust markets is as much a precondition for modernizing the public sector as it is for de Published in The Spirit of Reform: Managing the New Zealand State Sector in a Time of Change, New Zealand: State Services Commission, August 1996.

veloping the private sector. As Schick explains, “It is highly unlikely that the government will operate by the book when rules and regulations are routinely breached in private transactions”70.

In systems where informality flourishes, many public servants are hired because they know the right person or have contributed to some organization or cause. Since official pay levels are low, they may be as signed to one position but paid from another. Many may be “ghost workers”, appearing on the payroll but hold two or more positions and those who show up on the job may put in less than a day’s work be cause the official pay scale is so low.

Informality is a mixed blessing. In one way it cuts through red tape and unresponsive bureaucracies and bad policies so that things can get done. In another way it can open the door to (and sometimes institu tionalize) corruption and inefficiency. The positive side of informality can be the maintenance of fiscal discipline despite unrealistic budgets, and the delivery of public services despite rigid rules and controls. But the costs of informality are high, including: widespread evasion of civil service rules and other controls, the time and resources spent in beat ing the system, distrust of government, routinized corruption, and inat tention to the outputs and results of public programs and the perform ance of government agencies and officials. When bureaucrats are val ued for their verve in operating informally, it is easy for them and others trapped in the system to lose sight of the public purposes they are serv ing and the outputs they are supposed to produce. It is only a short step from disabling the controls to bending the rules for dishonourable purposes.

It is a much longer step for transition economies to adopt New Zea land style reforms, and a much riskier one. Schick concludes that “No country should move directly from an informal public sector to one in which managers are accorded enormous discretion to hire and spend as they see fit. New Zealand did not make this leap, and neither should other countries. Before reform, New Zealand had budgets that con trolled spending and corresponded to actual transactions; it also had a civil service system that governed how public employees were hired and paid. In other words, it had a formal public sector. This is an es Allen Schick. Why Most Developing Countries Should Not Try New Zealand Reforms.

sential precondition for adopting elements of the New Zealand model”71.

This suggests that for success in public sector reform in general and for alternative service delivery in particular a logical sequencing of steps is required. This is a sequencing that diminishes the scope for informal ity, while building managerial capacity and competence and experi menting with appropriately scaled initiatives to foster learning and con tinuous and gradual improvement. It is not a strategy that does nothing on alternative service delivery reforms until the building blocks are in place. Rather the strategy moves forward with these reforms in tandem with the bigger blocks.

First, progress in alternative service delivery requires parallel ad vances in the market sector. As the economy begins to operate less by informal norms and more by property rights defined by contract and not by practice, the government is likely to make more headway in installing rule based public management. There is no assurance, however, that formalizing the market sector will induce reciprocal changes in public institutions. Informality is as much a matter of culture as of practice; it defines social roles and relationships, and what is legitimate and ex pected behaviour, and informality persists even when underlying condi tions that gave rise to it vanish.

Second, modernizing the public sector means establishing reliable, workable, external controls. These controls require that operating units receive advance approval before taking personnel, spending, or pro curement actions. As old fashioned as external controls may seem to be, they are building blocks for a formal, rule based, honest public sec tor that can take advantage of, rather than be undercut by a proper bal ancing of informality. Operating in an externally controlled environment is an essential phase in the development process for it: (a) gives man agers the skills to operate – that is, to manage on their own, (b) builds trust between central controllers and line managers and confidence between citizens and government, and (c) encourages managers to internalize a public ethic of proper behaviour. As these basic conditions of formal management take root, it should be possible for central con trollers to ease the regulations by giving selective line managers broader discretion in operating their programs.

Allen Schick. Why Most Developing Countries Should Not Try New Zealand Reforms.

However, this learning and formalizing process can bear fruit only if the controls are exercised in a fair and realistic manner. In the case of civil service rules, this means that pay levels rise as the economy devel ops, the number of ghost positions declines, and public employees are provide with opportunities to enhance their skills and advance. If these conditions are absent, learning will take place, but it will be pathologi cal: how to beat the system, how to outmanoeuvre the controllers, how to get paid without really working, and so on.

Third, in the process of developing skills, confidence, trust, and pub lic regarding values, politicians and officials must concentrate on the basic process of public management. They must be able to control in puts before they are called upon (as in the NZ model) to control out puts; they must be able to account for cash before they are asked to account for cost; they must abide by uniform rules before they are au thorized to make their own rules; they must operate in integrated, cen tralized departments before being authorized to go it alone in autono mous agencies. These are some of the basics they must satisfy in or der for the public sector to develop.

Fourth, once the basics have been mastered, the public sector should be organized according to the principles of internal control. Ex ternal control and NZ type managerial discretion are not the only op tions for organizing governmental operations. Internal control is a third possibility. In a formal sense, internal control refers to the systems and procedures used by agencies to assure compliance with rules and to safeguard public assets. In a behavioural sense, internal control means that the rules are accepted as fair, workable, and legitimate. Without this normative underpinning, no system of internal control can be effec tive.

In practice, internal control gives managers broader discretion in managing their affairs. It shifts the focus from ex ante control to ex post audit, from control of individual actions to control within a broad band, from reviewing specific actions to reviewing systems. It means, for ex ample, that civil service rules dictate the total number of positions or the total within broad employment categories, and that operating depart ments make their own hiring decisions subject to oversight by central agencies. In the financial sphere, it means that if funds are available, agencies can make purchases, authorize travel, and take other spend ing actions without obtaining prior approval.

Finally, as the building blocks are being put in place, government and managers must be prepared to undertake true experiments so that effective learning can take place. Properly designed experiments in the area of alternative service delivery, with rigorous requirements for inde pendent evaluation and appropriate reporting, can go a long way in helping to accelerate new public sector reform. At the same time, the learning and successes that come from these experiments can rein force the building blocks that are being put in place to reform both the public and private sectors.